FACT 5: YES, IT IS EXTRA BANK LENDING PUSHING UP PRICES,

Not house prices rising with banks running after them with bigger mortgages

 

This is a technical point to do with Correlation and Causation which slick tricksters try to use to defend the banks’ immoral and incontinent behaviour. So this is a bit longer than previous Facts.

 It would seem clear-cut.  For decades now, mortgage credit 

has marched steadily upward with house prices, 

while other forms of bank credit have tailed off, 

as shown in this graph.

 For 60 years mortgages have followed every twist and turn upwards. 

Does that prove higher prices were caused by looser lending? Not necessarily!

 

Here’s what J R-C says

“One concern with the view that increases in mortgage debt drive up house prices

is that causation may run the other way: rising house prices (caused by some other

factor, for example, inelastic supply or rising incomes) lead to greater demand for

mortgage credit. However, there are reasons to be skeptical of this view.

 

First, a number of recent empirical studies using careful statistical identification

strategies, such as using financial deregulation as an instrument exogeneous

to demand, suggest that house price rises are more likely to be a response to

credit supply expansion rather than a cause. For example, in one US study (q.v.)

 the authors were able to isolate the extent to which credit liberalisation was

exogeneous to demand in impacting mortgage credit

expansion and associated house price increases. This study found that between

1994 and 2005, deregulation explained between one half and two-thirds of the

observed increase in mortgage loans, and between one third and one half of the

increase in house prices.

Second, other studies have found credit constraints 

to be the most important factor in explaining cross-country differences 

in house prices, which helps to explain different house price responses 

to the same shifts in interest rates.

Third, the UK was not alone in seeing rapid expansions in mortgage credit

correlated with rising house prices. For example, one study found that across 16

high-income economies, on average, mortgage credit rose from 40% of GDP in

the mid-1990s to 70% by 2007, with house prices doubling 

over the same period

Given significant differences in other potential explanatory variables in such 

a large sample of countries, such as the elasticity of housing supply or

changes in income, expansion in mortgage debt, which occurred nearly 

everywhere in the 1990s, is the most convincing intuitive explanation.

Indeed, recent cross-country empirical research shows 

liberalising mortgage credit has actually led to 

lower levels of home ownership 

as affordability has worsened across many advanced economies. 

Furthermore, rising mortgage debt and credit

liberalisation are not associated with increased construction of new homes, as is

often claimed.”